Special Charges Weigh On Delta And U.S. Airways’ Profits

Delta’s revenues rose marginally in the first quarter, but its profits fell due to lower gains from fuel hedges.

Separately, U.S. Airways’ first quarter revenues increased by 3.5% year-over-year, driven by higher passenger traffic. However, its profits also declined due to special charges related to the merger with American Airlines.

Looking ahead, the second quarter profits of both the carriers will benefit from the weakness in crude oil prices.

Additionally, Delta will continue to focus on its structural cost initiatives to drive growth in its profits. While, US Airways will continue to depend on increases in flying capacity, to drive growth in its passenger traffic and revenues.

Delta’s (NYSE:DAL) revenues grew marginally in the first quarter on gains from higher passenger fares. However, the carrier’s profits dipped sharply to $7 million, compared to $124 million in the first quarter of 2012, due to lower gains from fuel hedges and higher non-fuel costs. Excluding special items, Delta’s first quarter profits improved to $85 million, compared to a loss of $39 million in the prior year period. [1]

Delta’s profits in the first quarter benefited from marginally lower crude oil prices driven by softness in the global economy. However, the gains from lower fuel prices were offset by a loss of $22 million from the Trainer oil refinery. [1] Production at the refinery in the first quarter was impacted from a short term outage in a gasoline production unit and supply disruptions related to Superstorm Sandy. But, looking ahead, the Trainer refinery is expected to bring substantial savings to Delta’s fuel costs in 2013, subject to a continued hike in its production output. The carrier’s profits in the first quarter were also impacted from a lower year-over-year, mark-to-market gain from fuel hedges. In the first quarter, Delta benefited from $24 million in fuel hedging gains, down from $151 million in the year ago period. [1]

Additionally, first quarter profits of the carrier benefited from lower year-over-year interest payments of around $50 million, driven by a decline in debt. Delta paid down its debt to under $11 billion (adjusted net debt) at the end of the first quarter, from $12.7 billion at the end of 2012. [1] [2] The carrier anticipates to further reduce its debt to $10 billion by the end of 2012. [3]

Delta’s Outlook For The Second Quarter

Looking ahead, in the second quarter, growth in Delta’s top line will likely come under pressure from government austerity. In March, the carrier’s unit revenues – the amount generated from each passenger for a mile of flight, were impacted from fewer close-in bookings driven by government spending cuts. For April, Delta anticipates that the impact from sequester and weakness in leisure travel demand will lower its unit revenues by 2-3%, on a y-o-y basis. [1]

On the bright side, lower prices of crude oil will provide an upside to the carrier’s margin in the second quarter.

U.S. Airways’ Earnings

Separately, U.S. Airways‘ (NYSE:LCC) revenues in the first quarter increased by 3.5% year-over-year, to $3.4 billion on higher passenger traffic driven by capacity expansion. [4] However, this growth in top line was more than offset by special charges consisting primarily of merger related expenses and as a result, the carrier’s profits declined by 8% y-o-y, to $44 million in the first quarter. Excluding special charges, U.S. Airways’ profits increased to $55 million, compared to a loss of $22 million in the prior year period. [4]

More importantly, the carrier reiterated that its merger with American Airlines was proceeding as planned and that the merger could close in the third quarter of this year. We currently have a stock price estimate of $18.60 for U.S. Airways, around 10% above its current market price.

Looking ahead, U.S. Airways’ top line will continue to benefit from capacity expansion, which will likely drive growth in passenger traffic. For full year 2013, the carrier anticipates to raise its flying capacity by around 4% y-o-y, to 77.2 billion. [5]

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